Credit default swaps and corporate bond trading

Czech, Robert

doi:10.1016/j.jfi.2021.100932

Cited by 10 publications

(3 citation statements)

References 64 publications

(69 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The study, additionally, implies that banks with a lower ratio of risk‐weighted assets do not necessarily hold a less risky portfolio. Furthermore, regulatory capital relief enables dealer banks to better lay off unnecessary credit risk and hold more long and short positions in the bond market when they hedge via CDS (Czech, 2021).…”

Section: Discussionmentioning

confidence: 99%

Why do banks use credit default swaps (CDS)? A systematic review

Tabassum

Yameen

2023

Journal of Economic Surveys

View full text Add to dashboard Cite

Credit default swaps (CDS)—the fiercely discussed derivatives instrument since the explosion of the recent global credit crunch—are still subject to considerable theoretical and practical debate. More than a decade after significant developments in CDS literature, we currently lack a holistic understanding of the disparate strands of evidence, synthesizing analytical advancements in the field. We, therefore, conducted a systematic review of 143 publications (peer‐reviewed and first‐tier grey literature), focusing on three key areas: CDS characteristics and development, credit risk hedging, and determinants of CDS use, and performed the first bibliometric mapping for CDS. Our review makes the following contributions. First, measuring CDS characteristics and development gives a snapshot of how CDS remained a significant indicator for hedging corporate lending risk. Second, by mapping the research landscape, we provide insights into banks’ use of CDS; in particular, we show that banks use CDS to obtain capital relief, enhance liquidity and profitability, limit credit supply, and consequently mitigate their NPLs’ level. Moreover, the use of CDS by lenders increases firms’ leverage and value. Leaving a fertile area for debates and future research, the outcomes of this review help provide policy guidance to regulators and financial institutions that make informed decisions to use CDS as a credit risk management instrument.

show abstract

Section: Discussionmentioning

confidence: 99%

Why do banks use credit default swaps (CDS)? A systematic review

Tabassum

Yameen

2023

Journal of Economic Surveys

View full text Add to dashboard Cite

show abstract

“…iii Czech (2021) shows a liquidity spillover effect from CDS to bond markets. Hu et al (2022aHu et al ( , 2022b analyse the price discovery…”

Section: Data Availability Statementmentioning

confidence: 95%

“…Czech (2021) shows a liquidity spillover effect from CDS to bond markets. Hu et al (2022a, 2022b) analyse the price discovery process of CDS when out‐of‐the‐money put options are also available.…”

mentioning

confidence: 99%

Stock price informativeness and credit default swap trading

Silva

Vieira

2023

Int. J Fin Econ

View full text Add to dashboard Cite

This study develops a difference‐in‐differences analysis to assess whether trading onset of credit default swaps (CDS) on a firm's debt improves price informativeness in the stock market. Price informativeness is measured by the future earnings response coefficient, which captures the amount of information about future earnings conveyed in stock returns. Our sample comprises U.S. firms (firms experiencing CDS trading on their debt and a group of control firms) and covers the period 1997–2015. The results indicate that CDS hinder stock price informativeness, and thus the ability of prices to track long‐term fundamentals, especially before the arrival of negative information about the obligor. The identified impact is stronger when CDS are first traded, becoming less pervasive with the passage of time. Finally, the results indicate that effects were residual during the early stages of CDS market development and peaked during the period 2004–2008. The impact of CDS introduction weakened after new regulation and ISDA protocols entry into force in 2009. This empirical analysis contributes to the literature by improving knowledge on the consequences of CDS trading on economic and financial outcomes. It points out a negative effect on price informativeness in the stock market and indicates that it was smoothed by regulatory measures designed to improve market infrastructure and transparency.

show abstract